Latest developments in debt ceiling standoff

By The Associated Press, None
| 6:03 p.m.July 15, 2011

President Barack Obama answers questions on the ongoing budget negotiations during a press conference in the Brady Briefing Room of the White House in Washington, Friday, July 15, 2011. (AP Photo/Evan Vucci)
— AP

President Barack Obama answers questions on the ongoing budget negotiations during a press conference in the Brady Briefing Room of the White House in Washington, Friday, July 15, 2011. (AP Photo/Evan Vucci)
/ AP

Congress has until Aug. 2 to raise the federal borrowing limit or the government will run out of money and possibly default on its debt. House Republicans say they won't raise the debt limit without equal spending cuts. President Barack Obama and Democrats insist that higher revenues must be included.

Thursday's developments: The first, fragile signs emerge of a possible compromise plan: a proposal by the Senate's top two leaders to give Obama enhanced authority to raise the debt limit. It would be coupled with other procedures that could lead to spending cuts. House Republican reaction was unclear, though.

Markets react: J.P. Morgan's CEO warned that a failure to raise the debt ceiling could mean "catastrophe" for the economy. Credit rating agency Standard & Poor's warned that there is a 50 percent chance it will downgrade the government's credit rating within three months because of the impasse. Federal Reserve chairman said he fears financial system "chaos." Yet stocks and bonds have barely flinched. For now, investors appear to be betting that lawmakers will reach a deal.

What's Next: Obama scheduled a news conference at 11 a.m. EDT Friday. White House says talks will continue but has no plans to move them to presidential retreat at Camp David.

---

Some background:

Q: What is the debt ceiling?

A: It's a legal limit on how much debt the government can accumulate. The government takes on debt two ways: It borrows money from investors by issuing Treasury bonds, and it borrows from itself, mostly from the Social Security trust fund, which comes from payroll taxes. Congress created the debt limit in 1917. It's unique to the United States. Most countries let their debts rise automatically when government spending outpaces tax revenue. Congress has increased the debt limit 10 times since 2001.

Q: What is the federal deficit, and how does it differ from the debt?

A: The deficit is how much government spending exceeds tax revenue during a year. Last year, the deficit was $1.29 trillion. The debt is the sum of deficits past and present. Right now, the national debt totals $14.3 trillion - a ceiling set in 2010.

Q: Why is the prospect of not raising the debt ceiling so worrisome?

A: The government now borrows more than 40 cents of each dollar it spends. If the debt ceiling does not rise, the government would need to choose what to pay and what not, including benefits like Social Security, wages for the military or other bills. It also might delay interest payments on Treasury bonds. Any default could lead to financial panic weakening the country's credit rating, the dollar and the already hobbled economy. Interest rates would likely rise, increasing the cost of borrowing for the government and ordinary Americans.

Q: Who holds the $14.3 trillion in outstanding U.S. debt?

A: The U.S. government owes itself $4.6 trillion, mostly borrowed from Social Security revenues. The remaining $9.7 trillion is owed to investors in Treasury securities - banks, pension funds, individual investors, state and local governments and foreign investors and governments. Nearly half of that - $4.5 trillion - is held by foreigners including China with $1.15 trillion and Japan with $907 billion.

Q: How did the debt grow from $5.8 trillion in 2001 to its current $14.3 trillion?

A: The biggest contributors to the nearly $9 trillion increase over a decade were:

-2001 and 2003 tax cuts under President George W. Bush: $1.6 trillion.